Very often financial planners meet someone who intending to invest in stocks, bonds, real estate, mutual funds, gold etc.Such a statement clearly reflects that a large number of investors think that like stocks, bonds, gold and real estate, mutual funds are also an asset class which should be there in their portfolio.

MFs are Bridge to asset classes

The reality, however, is that a mutual fund itself is not an asset class. Rather it’s a bridge to investing in various asset classes like stocks, bonds, gold, real estate etc. at a cost and risk which are usually lower than when an investor invests in these assets on his own.

This is possible because say if an investor invests in an equity mutual fund, he is actually, although indirectly, investing in stocks. This is since the equity scheme in which he is investing has a portfolio of stocks which is managed by a group of individuals who have experience in investing and managing money. Investors in debt, gold, real estate and commodities could also expect the same. In India, though, real estate and commodity mutual funds are yet to be launched.

Low risk, low cost

Since mutual fund schemes are managed by a group of experienced investment professionals, the chances of them losing money compared to one who does not have much experience in investing in stocks, debt etc. are lower.In addition market regulator Sebi has also put in a cap on the total expense fee that fund houses can charge their investors in each scheme (maximum of 2.75% per annum).

Better tax efficiency

Mutual funds also offer better tax efficiency when compared with direct investing. One of the reasons for this is the government’s intentions to push retail investors to take the mutual fund route to investing.

When planning ones finances there is a requirement to invest in various asset classes. In such a situation mutual funds turn out to be one of the best options to invest and achieve ones financial goals. Mutual funds are basically a means to invest in any asset class with several advantages to the investors.

Mutual funds can be best explained if one compares it to a garden. In a garden there are many flowers and they are taken care by the gardener. In a similar way a mutual fund has many securities which are managed by a fund manager. This fund manager is concerned with generating returns for his investors and does not get married to a stocksecurity. This is a behavioural hitch while one looks at investing directly. He (fund manager) cuts all weeds (non-performing securities) and retains only the performing ones.

One of the clear advantages of investing in mutual funds is diversification which leads to reducing the risks associated with investing.

The common myth about mutual funds is that they invest only in equities. It is rather a tool which provides a pathway to invest in debt market, gold and even real estates. One of the biggest boons of a mutual fund is systematic investment which allows an investor to invest at regular intervals. This helps in rupee cost averaging which in turn helps investors get better risk-adjusted returns.

All in all mutual funds turn out to be one of the best products for an investors to help him achieve financial freedom. It is however important that product selection should be based on proper research and after understanding ones financial goals and risk taking ability.

Major banks, both private and public sector, recently revised their interest rateson fixed deposits (FDs). State Bank of India (SBI), the country’s largest lender, cut its interest rate to 6.50% for maturity periods between 3 years and 10 years. This is among the lowest FD rates in the industry now. The rate for 1-year FD stands at 6.90%. These rates are for deposit amounts of less than Rs1 crore.

On 24 November, the bank also cut interest rates for bulk deposits—between 125 basis points (bps) and 190 bps—across various tenures. Bulk deposits are those over Rs1 crore and are usually made by companies or high net-worth individuals. SBI has slashed rates for these deposits for different tenures. But cuts in bulk deposit rates would not impact the average retail depositors. The bulk deposits currently constitute only about 8% of the total deposits at the bank.

In such a scenario, if you still want to invest in FDs, and plan to invest less than Rs1 crore, what should you do? Here’s a look at what to do with your surplus money.

Numbers speak

Apart from large public and private sector banks, We looked at FD rates across mid-sized and new banks, including a small finance bank (see table).

On an average, among the top five public and private sector banks, 1-year interest rates stood at 7%, while it was 6.83% and 6.79% respectively, in case of 3- and 5-year tenures.

For new and mid-sized banks, the average FD rate for 1-year is over 7.52%. Their 5-year and 10-year offerings are at 7.44% and 7.39% respectively. Recurring deposits with 1-year maturity from Bandhan Bank Ltd and RBL Bank Ltd stood at 8% each, respectively.

Why are rates declining?

Increased liquidity on the back of rise in cash deposits by customers, due to the government’s demonetisation move, can be seen as one reason. According to the Reserve Bank of India (RBI), banks have received deposits in excess of Rs 5.11 trillion since the announcement. A large chunk of these deposits have been in savings accounts and banks will have to give a minimum of 4% interest on these deposits.

The influx of cash in such large volumes also means that there are more funds to be lent to customers. This is an indication towards a cut in the lending rate. A cut in lending rates is preceded by a cut in the deposit rates. The relationship between deposit rates and the marginal cost of funds based lending rate (MCLR) is such that a decline in deposit rates results in decline of the MCLR. And MCLR determines the lending rate for the consumers. Banks have to announce an MCLR every month.

Managing rate cuts

Repo rate cuts in the past monetary policies, and greater liquidity too, have led to a fall in deposit rates. In this case, the lower rates indicate that banks probably have enough liquidity for that particular tenure. Interest rates of FDs could be headed further downwards. Sadagopan expects RBI to cut key rates. Accordingly, the interest rates on FDs are also set to go lower.

But before that, factor in the real rate of return as well as the post-tax return in these cases to decide where to invest.

FDs do not look lucrative as an asset class right now.

The biggest risk for a retail investor is the risk of re-investment. With the rates set to go lower, what will you do with the money after 2 years (the end of a tenure

For savers, this is bad news. Interest rates in FD are going to go lower unless the inflation trajectory changes. It is a big blow for pensioners as well. However, if you still wish to invest in FDs, you should do it immediately and you must lock these funds for a longer term of 3-5 years.

But before that, factor in the real rate of return as well as the post-tax return in these cases to decide where to invest.

If you fall in the highest tax bracket of 30.9%, then 6.5% annual return from an FD would get reduced to a return of 4.49% post-tax. Now, let’s factor in inflation, say 5.28%—the average Consumer Price Index based (CPI) inflation from September 2015 to September 2016. In this case, a post-tax return of 4.49% for individuals in the highest tax bracket will translate to a negative return figure of -0.79%.

Similarly, if you are in the 10.3% tax bracket, then your post-tax return will be seen at 5.83%. With the average inflation figure, the returns here would be 0.55%. Some new banks and smaller financial institutions are offering a slightly higher interest rate than the top banks.

You can check the rates from various banks and then take your pick accordingly. You can go to individual banks’ websites to check these interest rates for different tenures.

Economics assumes humans are rational beings who do what is good for them.

However, this theory is not true for many, especially investors, who can be have irrationally. Let’s examine the biases that can lead to investing mistakes.

Anchoring

The concept draws on our tendency to stick to or “anchor“ our thoughts to a reference point. A completely irrelevant number in our head tells us what is doable and what is not. For instance, if a share hit a new high of say `1,200, and then fell to `700 following an US FDA letter, the new price looks cheap, because we are anchored on that price of `1,200.Similarly, when we buy a pair of sports shoes for `12,000, it is very easy for the salesman to push us a pack of three socks for just `999 ­ because we are anchored on `12,000 and 999 looks reasonable.The same pack of socks could well be available for `444 on sale elsewhere.

Mental accounting

This is the tendency to divide money into separate accounts based on a variety of subjective criteria. It applies to both source of money and what it is earmarked for. So it becomes easy for your bank’s relationship manager to convince you to leave `7 lakh in a liquid fund (for an emergency) while convincing you to borrow `10 lakh to buy a car. According to theory, individuals assign different functions to each asset group. This can make investing both inefficient and irrational. Then there is not understanding the importance of compounding, or the amazing impact that a 13% CAGR can have on a portfolio if this is achieved for say 30 years instead of 20. Not understanding the power of `n’ over `r’ in the compounding formula is part of this behavioural bias.People talk of `bonus’ shares as something they got free. Or blowing up the dividend income saying, “I have found this money“.

When you get an income tax refund, you should be asking `why did I pay so much of advance tax?’ instead of blowing it up partying or eating out. It gets worse when people lose money in their `trading portfolio’ but will not book profits in their investing portfolio. This leads us to another bias called `loss aversion’. This bias says we are not willing to admit, even to ourselves, that we made a mistake in buying the share in the first place.

Overconfidence bias

We systematically overestimate our ability to do certain things. Men tend to overestimate their investing skills and women their culinary skills, and there is no empirical proof of either. Women may make better investors and men better cooks, but we are conditioned to think in fixed boxes. In a class of 50 people if you ask how many of you are above average, you will find 45 hands going up, not 25. We tend to think: `I have been in the markets for 22 years…and I know everything’. It is amazing how long market experts have been predicting market movements ­ yet the business channels attract a huge viewership at 9 am ­ just when the market is about to begin. The way to overcome this is by maintaining an investment diary. Revisit your own predictions made about two years ago. Even better, click on articles of 12-15 months ago and see how many predictions were right.

Loss aversion

We feel there are more things which can be bad for us than things that are good for us! Let’s assume you have invested `5 lakh in a particular stock, and `1.5 lakh in another. The first investment has done very badly and is now down to `3 lakh. The second has done well and is now worth `3 lakh. Now, you need `3 lakh. Which share will you sell? Loss aversion bias says you will sell the second investment far more easily than the first. To avoid this be very clear that you are a long-term investor and not a shortterm speculator. Treat the `book’ profit and `book’ losses as real profit or loss, not notional. Then bearing the loss becomes easier.

Confirmation bias

Is it “seeing is believing“ for you? Sadly, the eye is not the brain. The brain dictates to the eye what to see, so you could well miss the 800 pound gorilla when your brain is processing something else. Our minds have a habit of introducing biases in processing certain kinds of information and events.

Hindsight bias

After an event is over, you feel it was something that could have been easily predicted. In reality, there is no way of predicting what is about to happen. For example, no expert thought that the US could stay with zero to negative interest rates for 8-9 years. Or when the price of oil was $130, none of us thought it would hit $40 in two years. Once the event happens people suddenly see why it happened. Maintaining a diary and recording what you think will happen is a nice way of preventing hindsight bias. Read your diaries and see whether your predictions were anywhere close to reality.

Gambler’s fallacy

When people contemplate buying penny stocks, they think a `10 share will become `20. They completely discount the probability of that happening.So they also look sadly at the IPOs that they missed ­ Maruti, Infosys, HDFC Bank and Hero Motors. However, if you had invested `1,000 in all the IPOs since 1992, chances are that overall you would have lost money. Just take a look at the graveyard of IPOs. We forget the role of chance. The next question to ask of course, what is the probability that we would have held on to those shares for 20+ years.

Herd behaviour

A legacy of our prehistoric roots. A group is moving together, and one person sees a brown animal behind the bush. Is it a tiger looking for food or is it a deer which can be food? No one has a clue. So one person says `tiger’ and all run and your ancestor is saved. That mentality still continues. So when your neighbour tells you he made money buying TCS, you also feel you can too. Well, now you know why you think like that.

· Open ended income fund with primary investment objective to generate a steady stream of income through investment in fixed income securities

· The fund is positioned in the long term bond fund category that focuses investment in high quality fixed income instruments across segments ie GSecs, Corporate Bonds and Money Market instruments

· The fund manager strives to generate steady return in the fixed income market by actively managing the fund’s portfolio on interest rate movements and credit risk

· The fund is suitable for investors with a time horizon of 1-2 years having moderate risk profile

Fund Details

Average Maturity

2.25

YTM

10.62%

Duration

1.75

Load Structure:

Entry Load: Plan A:Nil

Exit Load: Exit Load 3% if redeemed within 12 mths of allotment, 2% if redeemed after 12 mths but within 24 mths of allotment and 1 % if redeemed after 24 mths but within 36 mths of allotment ; 0.50% if redeemed after 36 mnths but within 48 months from the date of allotment.

Schemes which follow a combination of contrarian and value kind of investing would serve well investors who have been looking for prudent investments in present markets conditions.

Among the schemes which have consistently followed this style of investing and have justly rewarded investors with noteworthy performance is ICICI Prudential Value Discovery Fund. In the past five and 10-year periods, the scheme has delivered 23.5% and 16 % returns while its benchmark BSE 500 has delivered 12.8% and 7.7 % returns, respectively, in the same periods. This outperformance can be attributed to the stockpicking strategy of the scheme and its exquisite implementation by its fund manager Mrinal Singh, who has been with the scheme for the past five years. The scheme looks for those companies which not only have growth potential but also are attractive on financial ratios such as price to book value and relative market capitalisation. The scheme is not fixed about the market capitalisation of companies in the portfolio. A large part of the scheme (over 60%) is invested in large-sized companies while the remaining portfolio is divided between mid-and small-sized companies.

In the past six months (ending October), the scheme has invested in companies which to a large extent come under the defensive theme. Companies such as Sun Pharma, Wipro, Infosys and HDFC Bank are the ones in which the scheme has enhanced its exposure. Also companies where there has been little valuation comfort, the fund manager has promptly exited. These companies are ONGC, Hero MotoCorp and Tata Motors.